Tiger Towers, Inc. is considering an expansion of their existing business, student apartments. The new project will be built on some vacant land that the firm has just contractedto buy. The land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction cost is to be paid today. The project willnot change the risk level of the firm. The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are $75,000 per year. The project will require a $10,000 investment in net working capital.rdebt = 10.0%rasset = 15.0%requityWACC = 11.20%tax rate = 34%2%= 24.9% rfreeMultiple Choice-$5,100,000What is the unlevered after-tax incremental cash flow for year 0?-$3,660,000-$4,010,000=-$4,000,000DE= 3

Unlevered cash flow, also known as free cash flow to the firm (FCFF), represents the cash generated…

Answered: Tiger Towers, Inc. is considering an…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Mike's landscaping is considering a new 4-year project. The necessary fixed assets will cost $157,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $98,000, variable costs of $27,400, and fixed costs of $12,000. The project will also require net working capital of $2,600 that will be returned at the end of the project. The company has a tax rate of 21 percent and the project's required return is 10 percent. What is the net present value of this project?
Caradoc Machine Shop is considering a four-year project to improve itsproduction efficiency. Buying a new machine press for $410,000 isestimated to result in $150,000 in annual pre-tax cost savings. The pressfalls into Class 8 for CCA purposes (CCA rate of 20% per year), and it willhave a salvage value at the end of the project of $55,000. The press alsorequires an initial investment in spare parts inventory of $20,000, alongwith an additional $3,100 in inventory for each succeeding year of theproject. If the shop’s tax rate is 35% and its discount rate is 9%.Calculate the NPV of this project. (Do not round your intermediatecalculations. Round the final answer to 2 decimal places. Omit $ sign inyour response.)NPV $ Should the company buy and install the machine press?
Looner Industries is currently analyzing the purchase of a new machine that costs $158,000 and requires $19,900 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $29,600 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a five-year recovery period (see the table attached for the applicable depreciation percentages) and expects to sell the machine to net $10,300 before taxes at the end of its usable life. The firm is subject to a 21% tax rate c. Assuming a five-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $8,895 or (2) $169,900 (before taxes) at the end of five years. d. Discuss the effect of sale price on terminal cash flow using your findings in part c.
Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $284,000. A new salon will normally generate annual revenues of $60,490, with annual expenses (including depreciation) of $40,800. At the end of 15 years the salon will have a salvage value of $74,000.Calculate the annual rate of return on the project.
Bumps Unlimited, a highway contractor, must decide whether to overhaul a tractor and scraper or replace it. The old equipment was purchased 5 years ago for $130,000; it had a 12-year projected life. If traded for a new tractor and scraper, it can be sold for $60,000. Overhauling the equipment will cost $20,000. If overhauled, O&M cost will be $25,000/year and salvage value will be negligible in 7 years. If replaced, a new tractor and scraper can be purchased for $150,000. O&M costs will be $12,000/year. Salvage value after 7 years will be $35,000. Using a 15% MARR and an annual worth analysis, should the equipment be replaced?
Crane Lumber, Inc., is considering purchasing a new wood saw that costs $80,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $2,700 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Crane’s tax rate is 26 percent, and its opportunity cost of capital is 17.60 percent.
Assume it is January 2018 and Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $20,400 and will be depreciated in an asset class that carries a CCA rate of 30%. It will be sold for scrap metal after 3 years for $5,500. The grill will have no effect on revenues but will save Johnny's $8,200 in energy expenses. The firm has other assets in this asset class. The tax rate is 35%. Assume the discount rate is 10%. a. What are the operating cash flows in years 1 to 3? (Do not round intermediate calculations. Round your answers to the nearest whole dollar.) Amount The operating cash flow in year 2018 The operating cash flow in year 2019 The operating cash flow in year 2020 b. What are total cash flows in years 1 to 3? (Do not round intermediate calculations. Round your answers to the nearest whole dollar. Enter negative values with a minus sign.) Amour The total cash flow in year 2018 2$ The total cash flow in year 2019 $ The total cash flow in year…
Crane Lumber, Inc., is considering purchasing a new wood saw that costs $40,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $3,900 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Crane’s tax rate is 26 percent, and its opportunity cost of capital is 14.20 percent. What is the project's NPV? (Do not round intermediate calculations. Round final answer to the nearest whole dollar, e.g. 5,275.)
Sheridan's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $261,000. A new salon will normally generate annual revenues of $63,650, with annual expenses (including depreciation) of $40,200. At the end of 15 years, the salon will have a salvage value of $74,000. Calculate the annual rate of return on the project. Annual rate of return eTextbook and Media Save for Later % Attempts: 0 of 7 used Submit Answer
Your firm is considering an investment in luxury cars for its livery service between Oxford and CVG airport. The purchase price of the cars is $300,000 and the service is expected to contribute gross profit of $150,000 per year (excluding depreciation) for 3 years. The vehicles will be fully depreciated using straight-line depreciation over 3 years. The cars will be sold at the end of the third year for $75,000. There is no expected impact on NWC, the tax rate is 21%, and the WACC is 10%. What is the NPV of the investment?
You own a coal mining company and are considering opening a new mine. The mine will cost $119.5 million to open. If this money is spent immediately, the mine will generate $21.5 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.6 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 7.6%, what does the NPV rule say? NPV ($ mil पात 10 15 et Discount Rate (%) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) A. Accept the opportunity because the IRR is greater than the cost of capital. B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. O C. Reject the opportunity because the IRR is lower than the 7.6% cost of capital. D. The IRR is r= 11.46%, so accept the opportunity.…
APA is planning to expand its operations and plans to purchase a parcel of land on which to construct a building for their review center, which they will need 5 years hence. The current costs are: land: P2M; building: P3.5M. Since these are not needed immediately, the company plans to defer the purchase of the land and the construction of the building until they are needed. If the value of the land and the cost of the building are expected to appreciate at the rates of 10% and 8% per annum, respectively. What will be the total cost of the investment after 5 years? A. P8,580,275.74 B. P7,244,668.37 C. P8,363,668.27 D. None of these

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